Bitcoin Volatility
Free Banking in Bitcoin Chapter 8, continued
Last week in Free Banking in Bitcoin, we addressed the comparison between bitcoin and Visa and described a world where Visa insured against fraud during bitcoin transactions. This week, I address the common criticism about bitcoin’s volatility, both within and across the currency.
One of Bitcoin’s most common criticisms is that it is too volatile to be a store of value or medium of exchange. Volatility refers to the degree of variation in the price of an asset over time, typically measured by the frequency and magnitude of price fluctuations.
To examine this, let’s distinguish between volatility within a currency versus volatility across a currency. When people say Bitcoin is too volatile, they are referring to the price of bitcoin, specifically the bitcoin-to-dollar exchange rate. When the price of bitcoin exceeds $69,000 and collapses to $20,000, this price would be relevant if the user were to exchange between dollars and bitcoin. This could happen if the dominant currency were dollars. But even in this case, the volatility of the exchange rate will not matter for digital payments over short horizons since the exchange rate fluctuates within a year but not within an hour.
To see this, consider an individual who wants to buy a house that costs $200,000. He seeks a mortgage on the property, and his bank requires a down payment of 20%, or $40,000. Today, he would send a wire transfer of the down payment from his bank to his title company a few days before the closing date on his loan. That wire will cost around $45 and take a few days to settle. Instead, he could exchange $40,000 into bitcoin and transfer it over the Bitcoin network to the bitcoin address of the title company. The title company would receive the down payment in bitcoin, which it could either hold in bitcoin or exchange back into dollars. That transaction would take about an hour, enjoy all the security of Bitcoin, and bear a transaction fee of about $2. The price of bitcoin does not vary significantly over the time horizon of one hour to meaningfully affect this transaction.
